The 2022 housing market is the hottest in several years, and that means people are throwing themselves into it with the hopes of making a quick buck or reducing their tax burdens. Before you rush into it, here are some real estate tax tips for buying, selling, and renovating your home.
Tax Tips for Buying Your Home
There are some great ways to save some money on real estate tax items if you know where to look.
The first is on your 1098 – this is provided by your mortgage lender or servicer. It documents how much you paid in mortgage interest over the tax year, and you should get one if that interest totals more than $600.
In order to claim a deduction for mortgage interest, you must itemize. You’ll use Schedule A (Form 1040) as well as the standard 1040. This form is used if you aren’t renting the home (you’ll use Schedule E instead) or running a business out of it (you’ll use Schedule C). And if you’re buying a house soon, or you just bought one, you can deduct prepaid mortgage interest (points).
Here’s another tax tip: if your adjusted gross income is less than $100,000, you can deduct 100% of your mortgage insurance premiums as well.
You should also remember that you can deduct state and local property taxes, with a limit of $10,000.
However, there are several fees that aren’t deductible when it comes to real estate tax and the purchase of a home, including fees paid at or before closing (title insurance, appraisal, surveys, etc.), property insurance, depreciation, and utility payments.
Tax Tips for Selling Your Home
When it comes to selling your house, here are a few important tips and information.
First, taxpayers who are single filers can exclude up to $250,000 of capital gains on the profits made from the sale of their home, and married couples can exclude up to $500,000. But there are some stipulations: the sellers must have owned and used the home as a primary residence for 2 of the last 5 years before the sale. The two years do not have to be consecutive.
Sellers can also increase their basis to reduce their profits, since the average price of a home right now, with inflation, is just under $350,000. If your earnings for the home will exceed those covered by the exclusions above, you can increase the basis by adding certain home improvements like additions, landscaping and patio work, swimming pools, and new systems, to name a few.
It’s also important to remember that selling a large asset like a home can affect your income for the year, and thus affect other programs like healthcare, Medicare, and other government programs you may be benefiting from.
For more real estate tax tips, check out the IRS Publication 523.
Tax Tips for Renovating Your Home
There are several ways to relieve some of your tax burdens when you are renovating your home.
When you first purchase your home, you can – in many cases – take out additional money within that mortgage for immediate home renovation projects. Since this amount is included in your mortgage, you can add the interest paid throughout the year to your mortgage interest deduction.
Any renovations made for medical reasons can be deducted as medical expenses. This includes renovations to make your home more handicap-accessible including installing handrails, widening doors, adjusting cabinets and walkways to accommodate medical equipment or disabilities, and much more.
You can also get a 30% federal tax credit for energy generation if you add systems to your home that generate energy. Those systems include things like solar, wind, and geothermal installments.
It is important to note that while renovations and improvements can work in your favor when it comes to real estate tax obligations, home repairs do not fall in the same category. Adding a bathroom is an improvement, for example, but replacing the faucets in your existing bathroom is a repair.
Don’t Forget About Your Business Taxes
Though no one wants to think about taxes while they are buying, selling, or refinancing their home or investment properties, the unfortunate reality is that making time for these duties sooner rather than later can save you money in the long run.
When it comes to IRS Information Returns, there are several that are tied to your real estate and investment properties, including 1098 (Mortgage Interest Statement), 1098-MA (Mortgage Assistance Payments), and 1099-A (Acquisition or Abandonment of Secured Property), to name a few.
Sign up for a free eFile360 account today to help you organize and report your Information Return forms correctly and quickly.